RPT-ANALYSIS-Caterpillar cries 'uncle' on mining; investors cry 'buy'

CHICAGO, April 22 (Reuters) - An odd thing happened onMonday when Caterpillar Inc, the world's largest makerof earth-moving equipment, posted disappointing profits and cutits full-year forecast, blaming weakness in the mining industryit bet on so heavily in recent years.

Its shares rallied.

When other big U.S. companies, including General Electric, International Business Machines Corp and TextronInc, have warned of slowing profit growth in recentdays, the news has unnerved investors and sent their stockprices lower.

So what was different about Caterpillar?

Part of the answer, analysts said, was that its announcementwas not a surprise. The company has warned repeatedly in recentmonths that demand from mining customers was deteriorating.

Another factor was Caterpillar's upbeat assessment of theoutlook for the construction industry, especially in the UnitedStates and China. And a share buyback always helps - this one tothe tune of $1 billion in stock this year and as much as $3.8billion by the end of 2015.

But analysts said the overly bleak assessment Caterpillarprovided on Monday for its sales to the global mining industryalso, ironically, helped the shares. In a nutshell, no onebelieves it's really going to be quite as bad as it says, evengiven the recent slide in gold and copper prices on concernsabout weak global growth.

Rob Wertheimer, an analyst at Vertical Research partners,said the new outlook for mining implies a downturn that wouldput the mining industry demand back near 2009 levels, where itbottomed out in the last downturn.

The company is, after all, predicting the world economy isgoing to grow modestly enough to fuel demand for industrialcommodities that miners wrest from the ground usingCaterpillar's yellow machines.

"It's not a great economic climate, but it is good enough tokeep commodity production going," said Mike DeWalt,Caterpillar's corporate controller.

In fact, Doug Oberhelman, Caterpillar's chief executive andchairman, said on Monday the current drop-off in mining orderswas as much a function of the changing focus of its miningcustomers as it was a function of concerns about global growth.

"There has been quite a bit of management change with someof our big customers and...the new management is much morefocused on operating costs, short-term cash flow, sweating theirassets a bit," Oberhelman said during a conference call withanalysts.

Caterpillar's sales to the mining industry are moreprofitable than sales to construction and industrial customers.

The fatter margins were one of the reasons it made miningequipment a focus of its M&A activity in recent years, buyingBucyrus, a U.S. maker of giant excavators and shovels, for $7.6billion in 2010 and - more notoriously - ERA Mining, a Chinesemining equipment company, for $654 million.

In January, Caterpillar said it was writing offthree-quarters of the money it paid for ERA after uncovering"deliberate, multi-year, coordinated accounting misconduct" at asubsidiary of the Chinese firm.

The ERA debacle was, in the minds of many analysts, a symbolof a rash rush to double down on the notoriously cyclicalbusiness.

But even before ERA blew up, the company's exposure to theresource industry was being questioned as many of its key miningcustomers, facing investor backlash over unpopular takeovers,budget overruns and falling metal prices, slashed capitalspending, slowed development on some projects, shelved othersentirely and postponed -- or canceled new equipment orders.

Caterpillar, however, continued to hold out hope that miningorders, which began to fall during the second half of 2012,would improve as 2013 unfolded. The market was skeptical - andsent Caterpillar's shares down as much as 30 percent from the52-week high of $108.79 they touched last spring - as it waitedto see if the trickle of bad news on the mining front became atorrent.

On Monday, Caterpillar essentially gave up on mining for2013, saying it now expects sales of traditional mining machines-- large trucks, large loaders, large bulldozers and the like --to be down 50 percent from 2012, and the excavators and shovelsmade by its Bucyrus unit to be down 15 percent.

And that was just what the market was waiting for, analystssaid.

"The cat's out of the bag," said Larry De Maria at WilliamBlair & Co. "With Monday's report and conference call,Caterpillar confirmed what bears have been warning about: miningwill drag down EPS."

Adam Fleck, an analyst at Morningstar agreed.

Fleck said Caterpillar decision to throw in the towel onmining sales for 2013 gave investors confidence the company wasno longer in denial.

"Investors knew it would be bad, but wanted somequantification from the company," he said.

And it was that capitulation, ironically, that madeCaterpillar one of the S&P's biggest gainers on the day.